Why Did Kyle Bass Make Such a Big Deal About Centurion American in His Beef Against United Development?

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Nothing like the weekend to get the real estate buzz brewing. Almost every developer I spoke with — three, all off the record, of course — is scratching their head about the way Hayman Capital Management’s Kyle Bass has brought Mehrdad Moayedi, founder and CEO of Centurion Development, into the United Development Funding story spotlight.

Bass is accusing United Development Funding of running a Ponzi scheme at the Grapevine-based institution. The company was raided by the FBI on Thursday. United Development Funding has financed more than $1 billion in residential development across Texas.

Agents carried boxes out the company door all day Friday to see what UDF is up to.  We think it’s because, starting last month, Bass began posting reports and sending letters to the media with claims that UDF is mishandling investor REIT funds, overstating the value of its assets and making improper loans to developers.

A “billion dollar house of cards” and a “Ponzi-like real estate scheme,” is what he called it. Kyle Bass’s website is udfexposed.com.

It’s hard to tell exactly what the company has been doing, unless we look at one of their prospectuses. What a firm does with investor money is supposed to be outlined in a prospectus, and the client is supposed to read it (even the fine print) and understand.

One of Bass’ beefs is that UDF is overly concentrated with lending to two clients, one being Centurion America.

“The concentration issue becomes that much more problematic if the borrowers cannot repay the loans,” said Bass, whose hedge fund, Hayman Capital Management LP, claims that UDF is operating like a Ponzi scheme by “using new investor money to pay existing investors.” At a website put together by his team at Hayman Capital — UDFexposed.com — the likely outcome is bankruptcy, he predicts.

But here’s my confusion: Centurion’s acres of dirt are tangible assets — secured by lots. And they are located in some of the hottest parts of North Texas, too, like The Normandy in Plano, Prosper, Flower Mound. And our real estate market is not in trouble as of this date and time, though house flipping is making a comeback in Vegas — yikes! Not saying our market will always be so strong, and maybe that’s one of Bass’ points.  But Centurion usually makes damn good buys — many of the company’s assets were bought back when the market was low and the company held them. Kind of a bottom-feeder. Mehrdad bought the Stoneleigh out of bankruptcy, for example.

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Now I did consult a financial broker who explained that REIT funds are usually invested in real estate like malls, office buildings, strip shopping malls, hotels, or even entire neighborhoods of homes. In other words, tangible assets. Bricks and mortar on the dirt. They then get their income from leasing these out, and that’s how investors are paid. Instead, from what Kyle Bass has said in his website, United Development acted more like a bank for speculative builders. Then there is his accusation that loans in one fund were being paid off from loans in another fund. If funds were improperly handled, and the FBI or SEC sees evidence of it, Kyle Bass will be a hero. But he could be very wrong about Centurion.

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One developer thinks this is a cheap shot by Bass to make money by shorting his stock. United’s stock cratered. He also said Mehrdad Moayedi is one of the most respected real estate developers in town — his word is gold. When he gives a handshake, it means as much as his name on a contract. He also told me that companies share ownership of corporate jets all the time, sometimes the CEO’s don’t even know each other. This doesn’t mean they “share” like go fly-fishing together. It means the companies share the cost of operating the jet, just like a shared ownership home.

Another thinks Bass brought Centurion in to grasp more media attention, since he is the largest landholder in North Texas. Reporters might not find a story about a bunch of investors in a Grapevine REIT losing money all that sexy. Tell them the guy who is re-doing the Statler Hotel in downtown Dallas for $175 million with $46.5 million in taxpayer-funded financing incentives is involved, heads will turn.

And another thinks the SEC and FBI are getting too heavy-handed in general, going on financial witch-hunts, and putting on a good PR show of consumer protectionism post the credit default swap fiasco. The name Steve Cohen was mentioned, he being a huge New York hedge fund head forced to shut down SAC Capital after it pleaded guilty to insider-trading charges in 2013. Cohen personally coughed up $1.8 billion to cover SAC’s penalties. He was never criminally charged, but two former SAC employees were convicted — one is appealing, the other was excised from the case by the SEC.

The insider-trading cases were repudiated by a judicial panel and turned down for a hearing by the Supreme Court. In January, CNBC reported Cohen was cleared of all charges. 

In large part as a result of that, on Friday, a civil case against Cohen brought by the Securities and Exchange Commission for alleged failures to supervise errant employees in 2013 settled quietly without an admission of guilt or a financial penalty.

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United Development’s CEO Hollis M. Greenlaw soundly denies Bass’s accusations. He says Bass’s claims “clearly demonstrate a lack of understanding of the residential development project life cycle, which typically involves multi-phase master planned communities and the related financing structures.”

Centurion’s Mehrdad Moayedi told Steve Brown in passing that “all of its debt with United Development is current and that UDF is one of more than two-dozen lenders the company does business with.” Centurion issued a statement late last week through the media expert they (wisely) brought in to handle this, Harold Green of Green Public Affairs:

“Centurion American’s primary business is land development, and like most developers, Centurion utilizes a variety of lenders to finance projects. UDF is just one of more than 30 lenders that Centurion American has utilized. Centurion American and its executives had a business relationship with UDF. Centurion American plans to move forward with its ongoing development plans in North Texas.”

 

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Candy Evans

A real estate muckraker, Candy Evans is one of the nation’s leading real estate reporters. She is also the North Texas real estate editor for Forbes.com, CultureMap Dallas, Modern Luxury Dallas, & the Katy Trail Weekly. Candy has written for Joel Kotkin’s The New Geography, Inman Real Estate News, plus a host of national sites. Constantly breaking celebrity real estate news, she scooped former president George W. Bush's Dallas home in 2008. She is the founder and publisher of her signature CandysDirt.com, and SecondShelters.com, devoted to the vacation home market. Her verticals have won many awards, including Best Blog by the venerable National Association of Real Estate Editors, one of the nation’s oldest and most prestigious journalism associations. Candy holds an active Texas real estate license but does not sell. She is on the Board of Directors of Braemar Hotels & Resorts (BHR).

Reader Interactions

Comments

  1. Beck says

    Some of Bass’s criticisms (like sharing a plane) are a bit of a red herring. But the others (if true) would be material. He claims Centurion defaulted on a loan to a third party and a 2nd lien loan due to UDF IV. Plus they are not paying loans when due and extending the loans with no fees. This would be important to any investor in UDF considering that CA is far and away their largest borrower.

    Centurion does own many tangible assets, but historically land doesn’t cash flow predictably well unless leased (at least not well enough to support usurious 13% rates), and CA is not in the land lease business. Fundamentally, the capital structure of the investment needs to match the nature and intrinsic qualities of the asset and business plan, and Bass is alleging they do not.

    I think most of the takedown is aimed at UDF and not CA, but since CA compromises such a large percentage of UDF’s business, some investigation is necessary to understand the investment risks inherent in UDF. Bass has earned credibility in real estate by being one of the few investors that saw the subprime crisis coming. We’ll see if he’s right again (although this is a small bet compared to his massive current shorting of the Chinese yuan).

  2. Holman says

    You have it reversed. Bass did not short UDF to force a decline in value to reap a windfall.

    They read their 10-Ks & Qs, their prospectuses, the illiquidity of the shares, the up fron loads by the developer and the con-men who sold the shares, the investor class who was buying the shares, saw that the SEC had been investigating them since 2014 . . . and his team identified a ponzi scheme and they took advantage of it.

    You, D Mag, the Dallas Morning News, the City ALL tsk’d, tsk’d the sound of the klaxon, blaming the whistle blower . . .

    Until the Feebs with guns and vans show up.

    This is going to be big, protracted and ugly. You best run for the tall grass.

    Same dynamic that caused the S&L collapse. Co-mingling of funds. No oversight. No transparency. Lender participation in the upside. Projects financed 115%. No equity pain on the downside. Fees and commissions taken off the top and on the front end – no incentive to ensure feasibility and no pressure to hold down costs to place the asset into service.

    And a highly motivated, unsophisticated investor class treated as “marks”. Dupes. Retirees buying illiquid shares from con men.

    The only question that remains – will this be limited to Dallas? Texas? or will it collapse the financing scheme across the nation, triggering an Enron-esque melt down?

    Locally, there is a billion dollar loss in play however, nationwide the financing scheme is over $100 billion (public, non-traded REITs).

    Do NOT use the taxpayer to underwrite the losses this time around. When you privatize the gains, and socialize the losses you blow up the risk/return equation . . .

    and another groundhog day, the movie, ensues.

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